The Truth about Fannie Mae and Freddie Mac

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Keefe Bruyette & Woods

Months before the Government seized Fannie Mae and Freddie Mac, KBW upgraded their analysis to “Outperform” with a price target of $48 for Fan and $46 for Fred. KBW did not just keep their analysis to “Market Perform” they upgraded their analysis — right before the Government placed the companies into conservatorship.

Seems like they were off on their analysis in 2008!

KBW has had mixed analysis since the conservatorship.

In October 2009 KBW stated the shares of Fannie and Freddie was worthless. At the time, Bose George, KBW real estate analyst, said “in this scenario, both the common and preferred equity of the GSEs should be worthless.”

Seems like KBW was off on this analysis in 2009, too. The preferred and common shares are currently trading far from a $0 valuation.

“Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) have rallied sharply over the past two days following comments from Steven Mnuchin, the incoming Treasury Secretary, stating that the new administration wants to get the GSEs out of government hands. He also noted that resolving the GSE issue was a top 10 priority for the new administration. While it remains unclear how any privatization would work, we believe that even in the best case scenario, where the shares are privatized with a 2.5% capital requirement, the capital need will meaningfully dilute the value of the common shares, suggesting little upside from current levels. We continue to believe that the most likely scenario is one in which the common shares have no value. We reiterate our Underperform ratings and $1 price targets for both companies.”

Apparently now the preferred shares are a safe bet according to KBW, while the common shares are worth $1. If you are going to trade on this analysis you need to convince yourself that KBW is right this time. If you followed their advice in the past you likely would have lost a lot of money. Good luck to you this time if you believe them now.

“Inertia is a powerful ally of Fannie Mae and Freddie Mac. The longer Congress avoids acting on mortgage-finance legislation, the greater the chances the two companies survive.”

Reminds me of the old saying, “even a broken clock is right twice a day.”

KBW’s thesis for the common stock only being worth $1.00 is centered around the companies’ lack of capital. The terms of the conservatorship reduces the companies’ capital to $0 by the end of next year. These terms were established and followed by the Federal Housing Finance Agency (FHFA) whose mission was supposed to be to preserve and conserve the assets of Fan/Fred as their conservator.

Steven Mnuchin has made it clear that he wants to move quickly in removing Fannie and Freddie from conservatorship stating:

“It makes no sense that these are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe. So let me just be clear— we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.We’ll get it done reasonably fast.”

The new Administration believes that the conservatorship is a farce and plans to resolve the issues as quickly as possible. The quickest way to solve the issue is to unwind the conservatorship and return the capital that the current Administration robbed from the companies.

End the conservatorship, end the net worth sweep, cancel the senior preferred stock, cancel the warrants and return Fannie and Freddie’s capital…

If these things happen then the common stock is worth more than the $1.00 target placed by KBW. I’ve seen people speculate that the stock could be worth $100 – 150 if the senior preferred and warrants are cancelled. I’ve seen other projections that the common stock is worth $10 – 30 even if the warrants are exercised.

Anyone interested in investing in the common stock of Fannie and Freddie should certainly conduct thorough due diligence and arrive at their own conclusion. Your research will likely discover there are just as many folks claiming doom and gloom for the common stocks as there are people claiming an astronomical return potential.

Just realize that KBW is just one analyst — one whose analysis has been all over the board.

Disclaimer: I own common and preferred shares in both Fannie Mae and Freddie Mac.

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9 thoughts on “Keefe Bruyette & Woods”

good analysis of the “analysis” of KBW.
And who is KBW anyway? In this business anyone write stocks analysis but very few put their money where their mouth is. I never pay attention to an analysts that does not his work with his money.
If KBW says that the shares are worth $1 show me where are your puts or your shorts.

These analysts and media pundits are predicting based on political fads, trends and also based on past conduct of rogue conservators. These people are clueless about impact of anything else.

In case of FnF even the most devious elaborate plans like HERA, Conservatorship, SPSPA, NWS, .. have not worked as planned. FnF are still going strong like energizer bunnies.

Even totally un-anticipated ruling on constitutionality of single director agencies will have profound effect on FnF cases.

In case of FnF, conservator has violated almost all laws, rules, regulations thinking that the jurisdictional bar provisions of HERA will prevent any court challenges. At some point in time, when these cases will enter trial phase, conservator will be defenseless. Courts will be confounded by lawlessness treatment of systemically important FIs and violation of bill of rights.

Whether the GSEs were a great investment all along is either true or false. That some are just now realizing it is a great investment while others still bash the investment doesn’t change whether it always was a great investment. The soundness of any investment (or the truth of any proposition) isn’t a matter of consensus. Consensus often catches up with the truth and eventually corroborates it, but consensus never establishes it. Some of us were blessed to have seen this unfolding reality early on.